A forward pricing rate agreement (FPRA) is a contract between a government entity and a contractor in which certain rates are established for a specified period of time. These rates are projections of hard-to-estimate costs and are used to price contracts and contract modifications.
An FPRA is used to ensure a fair and reasonable price earned by a contractor and to protect a government agency from being charged unfairly. The contractor estimates these rates based on reasonable standards. The contracting government agency must approve them before the agreement is signed.
Typically, forward pricing rates are estimated by using a percentage or ratio. The percentage or ratio is based upon unforeseen differentials in prices. When the bill is issued, the costs are multiplied by this percentage or ratio. The rate protects the contractors by allowing an extra amount above and beyond the estimated quoted prices. The rate represents costs projected for material and labor costs, for example.
A contractor should submit an FPRA proposal each year. These agreements should also state what time period the rate is good for. The rate should be fair and be used only for labor, indirect costs, material and other items that are not easy to estimate.